Sentiment Speaks: What Comes Next – 4300SPX Or 3300SPX?

I find it quite entertaining how investors fool themselves on an almost daily basis. For example, many have tried to argue with me that the decline from the high struck on December 13 was due to what the Fed announced on December 14. When I simply phrase it in that manner alone, can you see the issue with this perspective?

Well, first, we have to remember that the market topped and reversed on a better-than-expected CPI report. Yet, despite the massive initial reaction to the upside on the news, the market ended almost flat that day. It was quite an impressive reversal for which there was no “explanation.” And, when the market continued lower during the rest of the week, investors were quick to blame the Fed. But, if you are being honest with yourself, the downtrend began the day before the Fed news, and it began on very good news. But, that does not work well for the media, so they have to use the Fed as the “reason” as to why the market was down for the week.

Oh how I love quoting Robert Prechter’s book The Socionomic Theory of Finance (which is a must read for all investors who want to better understand the stock market). So, I am going to repost one of my favorite quotes from that book:

“Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to “psychology,” which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.

Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”

I can usually point to at least one instance of market action per week which evidences the truth of this statement. And, this past week was no exception.

If you have been following my analysis of late, you would know that I was looking for the market to retrace back to the 3720-3867SPX, even though we were hovering near the highs around 4100SPX when the market was trying to break out. Even many of the members of The Market Pinball Wizard were doubting the market’s ability to provide us with that retracement. Yet, here we are today.

In fact, when the market rallied off the pre-market low struck on December 20, and moved up to the high struck the early morning of December 22, many assumed that the market had struck some form of bottom. So, allow me to present to you two charts which outlined my expectations this past week. The first was provided to our members on Monday near the market close. With the chart, I noted to the members of The Market Pinball Wizard that I expected the market to complete the wave 3 during the night, and begin the wave 4 rally back to the pivot.

As we now know, the market bottomed during the night on the 20^th, and began the rally right back to our wave 4 target in the pivot, which completed by December 22. And, despite quite a number of investors thinking we struck some form of low, my primary analysis suggested that we should see one more drop before a bottom would likely be struck. And, I even provided a target box for that 5^th wave lower low I was expecting.

As we now know, the market came within 6 points of my target box before we began the rally started on Thursday.

Now, I want to ask you a question – do you see any reference to news or economic reports or the Fed on my charts? Yet, the charts identified all the turning points we experienced over the last week. And, many clearly ask how this is even possible? Well, when you understand how market sentiment drives market moves, then you have access to tools that can identify these turning points without the need for news.

And, the members of The Market Pinball Wizard very much appreciated the guidance sans the noise of news:

“Literally like seeing the future! Avi’s magic is the real deal.”

While my expectation remains that, as long as we hold support, I am looking for a rally to 4300SPX. But, I want to warn you that the wave action is taking shape with corrective structures. That means that markets are less predictable in that type of environment. Therefore, while there is the potential for the market to have struck a local bottom, I would need to see a full 5-wave rally take us back to at least the 3960SPX region to make the rally to 4300SPX a higher likelihood.

In fact, what I am looking for is a 5-wave rally to 3960+, followed by a corrective pullback, thereafter, followed by a rally over the high of the initial 5-wave structure to make it a high likelihood that we are on our way to at least 4300SPX.

Overall, the market has been acting pursuant to our expectations off the October 13 low, along with the current pullback into our support region I outlined weeks ago to you. Ideally, the low struck this past Thursday should hold and a 5-wave rally to 3960SPX should be seen in the coming week to increase the probabilities that we have begun the rally to 4300SPX. A break of this past Thursday’s low would have me question this potential.

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